Kryptolesson #16

Bitcoin and green mining

There is a popular view that Bitcoin mining uses predominantly dirty, fossil fuel-based power and has a comparatively extreme carbon footprint. Critics are usually quick off the mark to point out its excessive energy consumption, conjuring up the specter of unaffordable electricity prices that could deprive entire homes of power. Below, we address the most common criticisms surrounding Bitcoin mining and show that many of them are in fact exaggerated or entirely unwarranted. We also point out that Bitcoin is not nearly as bad for the environment as claimed by many of its critics – and far greener than it used to be.

Many articles about Bitcoin’s climate footprint are often poorly-researched, sloppy and fraught with misconceptions and inaccuracies. In all fairness, most people do not have to deal with electricity data in everyday life. As a result, they may find it difficult to put Bitcoin’s energy footprint into context. At first glance, the fact that the Bitcoin network needs more energy than countries with millions of inhabitants such as Bangladesh or Colombia seems outrageous. Comparisons like these are frequently used in the public debate to level criticism at the scale of Bitcoin’s electricity consumption. They also give rise to concerns about Bitcoin’s alleged energy hunger that might be spiraling out of control.

Bitcoin has also been criticized by the media for its high “energy per transaction” use, especially when contrasted with Visa transactions. This frequently cited metric, however, is largely comparing apples and oranges. Bitcoin is best compared to the base layer of an entire monetary system while credit card payments are running on top of the entire banking stack whose overall costs are much harder to compute. The frequently cited metric “energy per Bitcoin transaction” is therefore highly misleading, in part since it suggests that more transactions entail more electricity consumption. What is typically overlooked is that Bitcoin’s energy is spent per block (blocks created roughly every 10 minutes), that is, more transactions do not translate into higher energy consumption. In the not-too-distant future, the Bitcoin Lightning Network, a Layer 2 scaling solution, is likely to allow for an almost infinite amount of transactions.

For some reason, Bitcoin is often singled out among other industries when it comes to energy consumption and environmental pollution. For example, the fact that Bitcoin uses significantly less energy than gold mining ↗ is rarely mentioned. In addition, gold mining uses trillions of liters of water and billions of tons of cyanide, let alone all the mercury used in illegal gold mining.

Bitcoin critics often conflate “energy use” with “electricity use”. The latter refers to the electrical grid which more than a billion people on Earth do not have access to. Importantly, Bitcoin will not compete for the same energy resources that could otherwise power homes or fuel the economy. In fact, the presence of Bitcoin mining in certain regions typically has no impact on the price of energy because there is an overabundance of stranded local energy. Equally important, electricity decays rapidly once it leaves its point of origin, i.e. it is hard to transport across large distances. To put this into perspective, of the roughly 160,000 TWh ↗ of energy being generated globally each year, 50,000 TWh gets lost, while just 25,000 TWh of it is generated by the electrical grid.

Bitcoin currently consumes around 72 TWh ↗, thus accounting for just 0.15 percent of the energy wasted each year, or roughly 0.3 percent of the World’s electrical grid.​ What is hardly up for debate is the fact that Bitcoin consumes a lot of energy, thereby producing massive externalities in the form of carbon dioxide (CO2 ) emissions. Bitcoin is a global, permissionless, decentralized and censorship-resistant store of value with an immutable ledger. Why it might be worth to secure such a system is the topic for another article.

From a carbon perspective, it does not matter how much energy Bitcoin uses, but rather how much emissions it produces. That is where renewable resources come into play. A look under the hood shows that Bitcoin is surprisingly green already, holding up much better than portrayed by the media. A 2020 report ↗ by the University of Cambridge concluded that 76 percent of proof-of-work (PoW) miners rely on some degree of renewable energy. On the downside, renewables made up only 39 percent of miners’ total energy consumption at the time. However, more recent data ↗ suggests that sustainable energy now accounts for 56 percent of Bitcoin mining – suggesting that Bitcoin is “cleaner” than almost any other industry or country. Below we give an overview of different types of energy and the role they play in Bitcoin mining:

‍Hydro power: Hydroelectric energy is the most common Bitcoin energy source globally, and it gets used by at least 60 percent of PoW miners across the Americas, Asia-Pacific and Europe. Until China’s recent crackdown on mining farms, most Chinese Bitcoin miners were located in regions that offered cheap and abundant energy from a massive overbuild in hydroelectric capacity, such as Sichuan Province whose installed hydro capacity is double what its power grid can support ↗, leading to a tremendous amount of curtailment ↗ (or waste). There is also abundant hydro power in places such as the Pacific North-West, Upstate New York, Latin America, Iceland or Sweden, to name but a few. Since the excess capacity cannot be sold anywhere, local utility companies often welcome miners with open arms.

Wind and solar: There is evidence that Bitcoin mining incentivizes the development of new cheap renewable energy sources. Wind and solar projects allow for a faster payback if they produce too much energy for the grid which can be sold to mining farms that settle nearby. For example, Texas has attracted many large-scale Bitcoin mining operations thanks to abundant wind power ↗. The US state's wind farms are located remote of its largest cities and typically generate power that far exceeds the capacity of its transmission lines. As a result, local power producers are willing to sell excess electricity cheaply to Bitcoin miners.

Gas power and methane: Bitcoin mining can also help curb the emission of methane which has over 50 times ↗ the green house gas effect of carbon dioxide. Gas flaring is a byproduct of fracked shale production and is estimated to produce about 1 percent of global carbon emissions. Instead of using it as an energy source, oil companies often simply vent it into the atmosphere or burn the gas at the well site because more gas than can be used or stored is produced. Thanks to portable mining solutions for oil and gas facilities, Bitcoin miners now use otherwise flared methane in remote oil fields and burn it much cleaner to mine Bitcoin.

Coal mining: Bitcoin’s coal mining footprint is likely to wane materially going forward. Asia-Pacific was the only region where coal came close to hydro power in terms of usage. While China is not the sole country where miners have relied on coal, the Chinese provinces of Xinjiang and Inner Mongolia used to be heavily coal powered. The good news: China’s crackdown on Bitcoin mining which took roughly half of the global hashrate offline appears to be permanent.

New data from Cambridge University ↗ suggests that the geography of mining has drastically changed in 2021 in favor of renewables. Miners are somewhat flexible and mobile when looking for cheap, reliable and long-term energy sources, with many of them heading to the US. There’s still room for ​ improvement, but the data suggests that to get a competitive advantage, Bitcoin is steadily moving toward more green energy sources in the search of cheap electricity. The latter is typically found in remote regions with overcapacity of hydro power, stranded or curtailed energy. Rising public climate change awareness will also nudge miners that have long relied on fossil fuels to look for greener pastures.

Photo by JB